Scalping is a trading strategy that employs extremely short timeframe high leverage positions to maximize exposure to short term volatility.
Option Scalps ("OS") is simply scalp trading facilitated by underlying option technology.
OS LPs deposit single-sided liquidity into an OS Pool. This can be in the form of a base asset (e.g. $ARB or $ETH) or the quote asset $USDC. Base assets are used to provide liquidity for short positions while $USDC is used to provide liquidity for long positions.
The risk for LPs is the event that keepers fail to liquidate positions in time. While this is rare, it may result in a trader's collateral being insufficient to fully reimburse the OS liquidity pool.
OS traders deposit $USDC as collateral and can trade using the following parameters:
- Trading Pair: ETH/USDC, ARB/USDC
- Direction: Long, Short
- Time Frame: 1m, 5m, 30m, 60m
- Leverage: 1.1-110x
- Order Type: market order, limit order
When opening a scalp position, a trader pay a premium to OS LPs. Additionally, they will post margin equivalent to Position Size/Leverage.
Limit orders allow for more precise price execution and for users to earn Uniswap swap fees if the order is successfully filled.
Traders may execute market orders which will open or close a position at the current spot price.
When a market order is executed, the corresponding amount of liquidity from the OS LP will be borrowed and swapped immediately on Uniswap at the current spot price.
Traders may set limit orders which designate a price that must be hit before their position is opened or closed. This allows more precision for trade execution.
When a limit order is opened, the corresponding amount of liquidity from the OS LP will be borrowed and LPed on Uniswap at their limit order price. If the price hits, their position will be opened and they will earn swap fees since their position is filled by Uniswap traders.
Traders pay 18.5% interest to OS LPs for the duration their limit order is open. Premiums are only charged if a limit order hits.
Note that if the limit order price does not hit, a trader's position may not fill.
OS trading shares similar liquidation risk as any form of leveraged trading. When ChangeInPrice% x Leverage (in an unprofitable trade) exceeds 100%, a trader's position will be automatically closed and all collateral is lost.
Option Scalps use isolated pairs consisting of a base and quote asset (e.g. ARB/USDC) only. OS LPs can provide base asset liquidity for short positions and/or quote asset liquidity for long positions.
When an OS trader opens a position, they may select their trading pair, direction, time frame, position size, and leverage amount.
Margin to be posted (in $USDC) is determined by Position Size/Leverage.
Premium to be paid for opening a position is determined by position size and time frame - the larger the position size and the longer the time frame, the more expensive the premium.
We will use a long ARB/USDC position as an example, with $ARB being the base asset and $USDC being the quote asset
When a long ARB/USDC trade is executed, the $USDC (the quote asset) is swapped for $ARB (the base asset).
If the price of $ARB increases and the trade is closed or expires, it is swapped back for $USDC at a price. The $USDC from the quote asset pool is fully repaid and the excess is given to the OS trader as profits.
If the price of $ARB decreases and the trade is closed, expires, or liquidated, it is swapped back for $USDC at the new spot price. The $USDC from the quote asset pool is partially repaid and the remainder is compensated from the trader's margin.
In both scenarios the quote asset pool is made whole. For a profitable trade, this is from the sale of an appreciated asset whilst in an unprofitable trade the difference is repaid from the margin.